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Developing country borrowing and domestic wealth

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  • Mark Gertler
  • Kenneth S. Rogoff

Abstract

We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.
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Suggested Citation

  • Mark Gertler & Kenneth S. Rogoff, 1989. "Developing country borrowing and domestic wealth," Proceedings, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfpr:y:1989:x:4
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    References listed on IDEAS

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    2. Greenwood, Jeremy & Williamson, Stephen D., 1989. "International financial intermediation and aggregate fluctuations under alternative exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 401-431, May.
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    Cited by:

    1. Niloy Bose & Jill A. Holman & Kyriakos C. Neanidis, 2007. "The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 433-452, July.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich-to-Poor Capital Flows," American Economic Review, American Economic Association, vol. 94(2), pages 53-58, May.
    3. Sule Ozler & Guido Tabellini, 1991. "External Debt and Political Instability," NBER Working Papers 3772, National Bureau of Economic Research, Inc.
    4. Reichlin, Pietro, 2006. "Relating Output and Volatility in a Model of International Risk-Sharing with Limited Commitment," CEPR Discussion Papers 5557, C.E.P.R. Discussion Papers.
    5. Ricardo N. Bebczuk, 2000. "Financiamiento empresario, desarrollo financiero y crecimiento," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2000, July-Dece.
    6. Bozhechkova, Alexandra (Божечкова, Александра) & Goryunov, Evgeny (Горюнов, Евгений) & Sinelnikov-Murylev, Sergey (Синельников-Мурылев, Сергей) & Trunin, Pavel V. (Трунин, Павел), 2017. "Capital Controls: World Experience and Lessons for Russia [Ограничения На Движение Капитала: Мировой Опыт И Уроки Для России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 8-43, April.
    7. Ricardo N. Bebczuk, 2000. "Corporate Finance, Financial Development, and Growth," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2000eng, July-Dece.

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